UK defined benefit pension schemes are paying more attention to longevity risk as more consider running on rather than moving straight to buyout, according to Aon.
Aon suggests that better funding levels have given trustees and sponsors more choices, leading many to review their risk strategies.
Some schemes plan to run on for a period before buyout, while others are considering a longer-term run-on approach. Aon says managing longevity risk is becoming a bigger part of these plans.
The firm expects demand for longevity solutions to rise as pricing in the reinsurance market remains attractive.
Aon head of the Demographic Horizons team Matthew Fletcher says: “Many schemes have benefited from significant funding level improvements, have substantially mitigated market risks such as inflation and interest rates, and are now re-assessing their residual risk exposures and how to optimise strategies. Irrespective of the endgame being targeted, longevity and broader demographic risks will increasingly be dominating their thinking.
“These risks are real and material – we have recently seen changes in liability values of more than two percent over a single year, solely due to re-calibration of the Continuous Mortality Investigation mortality projection model. Compound this with longer term impacts – medical developments such as the expansion of GLP-1 medications, or increased use of artificial intelligence within the healthcare sector, as well as other macro-factors such as changes in government spending on the National Health Service – and it’s clear that these risks have real potential to significantly impact a scheme’s timescale for achieving its endgame goals.”
Aon partner in the risk settlement team in the UK Hannah Brinton says: “The good news is current pricing to mitigate these risks is highly attractive. The longevity risk hedging market – supported by global reinsurance market appetite for UK longevity risk – is well established. What has changed in recent years is the pricing of this risk – it has reduced dramatically while a wider size-range of schemes have been able to hedge it through longevity swaps, both for current and future pensioners.
“A number of factors are driving this attractive pricing, including the highly competitive reinsurance landscape and the higher interest rate environment. The expanded accessibility to schemes – longevity swaps are no longer the sole preserve of £1 billion+ schemes – has been facilitated by reinsurance market appetite and structural simplifications.
“Importantly, hedging longevity risk is entirely compatible with retaining flexibility for later annuity purchase – so it fits with both run-on and buyout endgames. Taken together, these developments mean longevity risk management should be a priority item on trustee and sponsor agendas.”
